TCJA and Estate Planning

Office file folder in a business. Legal will for inheritance

The Tax Cuts and Jobs Act was passed in 2017. The legislation increased the amount that is exempt from federal estate taxation.  Between 2018 and 2025 the amount exempt from taxes is $11,180,000 for singles (more than $22 million for couples) and is adjusted for inflation each year after 2018.  In 2026 the amount will fall back to $5,400,000.  A majority of individuals will never exceed either amount; however, estate planning is more than avoiding estate taxes.  Some decisions about property transfer can have other tax consequences. Changes in tax law can make old estate plans obsolete.

One important element of estate transfer is the “step up” in basis of real estate and other property that has gained value over time.  An acre of ground purchased for $200 (original cost or basis) in 1984 could have a value of $4000 or more in 2019.  If the property were sold it would be subject to capital gains taxes on the $3,800 of appreciated value. If the property is inherited, it passes without taxation and the basis is reset to the market value the day the owner died.  This “stepped-up basis” is a key consideration when decisions are made about gifting property, setting up trusts, and developing other estate transfer plans. Example: suppose you gave your daughter that acre of land today. Upon selling the land, she would owe income tax on the $3800 capital gain; if she had received it as an inheritance after your death, the sale would involve little or no capital gain, saving her the tax bill. 

Transfer of wealth through estate plans has also resulted in new requirements for reporting and keeping records on appreciated property (real estate, stocks, etc.) with a stepped up basis.  New IRS rules define the property subject to appraisal, steps to ensure accuracy, and required reporting to the IRS and beneficiaries.  Executors are responsible for date of death appraisals. Appraisals must be kept by the beneficiaries and used if the property is sold.  It is wise to complete the date of death appraisal promptly; the IRS is more likely to question an appraisal that is completed a long time after the death of the owner. Details are included in IRS Form 706.

Ag Decision Maker is an Iowa State University Extension source of additional estate planning resources and information.  Scroll down the page to find estate planning publications.

 

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Surviving Tax Season???

It’s April 16 and most of us survived another tax season. Were you happy with your refund or did you have to pay in more than you have in the past? If your refund was too big, or you had to pay in a lot, you may wish to revisit your Form W-4.

Every time you earn income, you’ll most likely owe state and federal income tax.  Your Form W-4 determines how much tax is withheld from your paychecks. Your employer deducts taxes based on the number of allowances you claim on your W-4. This system works well if you’re a “standard” taxpayer who files single, has one job, and claims a standard deduction.  But if you don’t fit into this category—and many of us don’t—it’s likely that you have too much or too little tax withheld.

Workers complete form W-4 when they start a job. For many people, that is the last time they pay attention to it. Has there been a change in your household – did you add a child, get married or have a divorce, change jobs or did your spouse get a job?  Any of these changes may impact your tax status; that means reviewing your form W-4 is a good idea. In addition, changes in tax law may affect your ultimate tax bill; after passage of the most recent federal tax bill in late 2017, some workers consulted with the payroll office of their employer to review their allowances.

When you have too much money withheld from your paychecks, you end up giving Uncle Sam an interest-free loan (and getting a tax refund). Ask yourself if there are better ways to use that money. Why not take home more money in your weekly paycheck? Or invest the proceeds and earn interest on it?  On the other hand, having too little withheld from your paycheck could mean an unexpected tax bill or even a penalty for underpayment. Either way, there’s a better way to manage your hard-earned money.

The key to having the right amount of tax withheld is to update your W-4 regularly.  Do this whenever you have a major personal life change. For people who wish to avoid providing that interest free loan to the government, the goal is to file a tax return with zero refund and zero owed. While it is rare to get an actual zero as a result, these folks are generally happy if they either owe a small tax bill or receive a small tax refund. If you count on a big tax refund every year, you should also pay attention to your withholding, because how much you have withheld directly impacts your refund.

Is it time to call your employer’s payroll office?

 

Susan Taylor

Susan Taylor

Resources are important whether you are looking to rent your first apartment, pay your bills, buy your first home or send your child to college. There are many ways to save money to reach your goals, and hopefully ISU Money Tip$ will be one of them. I enjoy traveling, needlework and am a novice gardener.

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Identity Theft and Your Tax Return

Social Security numbers have to be correct on tax returns. At the Volunteer Income Tax Assistance sites we receive an immediate reject on the return if the name and numbers don’t match Social Security records.  We also receive a reject code when a social security number has already been used on a tax return. Individuals must still file a return, but with the electronic submission blocked, it must be a mailed copy.

The IRS  and Iowa Department of Revenue will send you a letter saying more than one return was filed in your name.  Be sure to respond to the letter promptly. Use the internet to validate the IRS phone number and address (scam artists are now creating very good look alike letters). Call and discuss the evidence needed to support your tax return submission.

A letter will also be sent if the IRS or Iowa Department of Revenue has a record of earned income that you didn’t report on a return. It may mean your SSN was used by someone else so they could avoid paying taxes on their earnings.

Social Security numbers can be obtained through scams or by buying numbers that were stolen in a security breach.  If you have been notified that someone has committed tax-related identity theft with your personal information, report it promptly. Go to identitytheft.gov to complete and send the IRS Identity Theft Affidavit.  By doing this, you will also file a complaint with the Federal Trade Commission and obtain an ID Theft Recovery Plan.

After your identity is falsely used for tax purposes, the IRS will send you an annual PIN number (a new number each year). This PIN number will be added to your tax return to verify your identity to the IRS, and will prevent anyone else from continuing to use your social security number on false claims.

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Helping the High School Graduate Financially

Let’s be truthful, some of us do an excellent job helping our 17-18 year old get ready for the real world even if we also remember situations when we hope they didn’t pay too close attention to our bad habits.  Adult finance is complicated by some natural tendencies toward spending and savings. I’ve heard more than one parent wonder out loud how a child could grow up in their house and manage money the way they do.

Whether you have full confidence in their money management skills or expect to get several calls asking for guidance when the issue is totally out of hand, here are some tips that may help you and the 17-18 year old in your life:

Reduce their risks-

  • Review your insurance policies and find out if the coverage extends to include their property while they are living away from home temporarily. If they are leaving home permanently, pick up information about renters policies and explain it to them.
  • Share tips about auto insurance coverage. Remind them that valuables in the vehicle are not insured. Consider whether it makes financial sense to have them insured through their own policy. If the premium will exceed 10% of the value of the vehicle, it may be time to switch to liability only.
  • If they will continue to be covered by your health insurance plan: 1) confirm they will have access to the network providers; 2) make sure they are carrying an insurance card; and 3) share a quick reminder of typical preventive services and what to plan for co-pays.

Think ahead-

  • Recommend filling out their W-4 with a 0 for withholding exemptions until they have filed their first tax return. Several part-time jobs combined together can result in underpayment of taxes due.
  • Consider giving them a list of the records you save, electronically or on paper, for financial reasons.
  • Give them a shredder.  Not an exciting gift, but important to keep their identity intact.

Keep the door open for conversations without judgement. We’ve all done stupid things with money – why not make sure the young adult learns some lessons from you and not the hard way.

 

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Adjusting Your Withholding

Is your W-4 declaration of withholding allowances the same one you filled out when you started working for your organization, and that was decades ago? The W-4 form tells your employer the amount of federal and state income tax to withhold from your paycheck. Our tax laws are a “pay as you go” model. A penalty is assessed if you don’t have sufficient funds withheld to cover your expected tax liability.

When a tax return results in a “taxes due” outcome, individuals are likely to take action – they change their withholding elections to avoid having to pay next year. On the other hand, when tax returns result in significant refunds, taxpayers don’t always take steps to adjust withholding, even though that would place more income in their own hands to manage.

W-4 forms aren’t user friendly and that may be a reason we avoid updating them. It may also take a trip to the HR office if you can’t submit the form online. To change a pension or annuity withholding you will use a W-4P.

It’s easy to make errors,  especially if you have multiple sources of income. The IRS has a Withholding Calculator available to help. It has been newly updated to reflect the recent changes in tax law that will impact 2018 tax returns.  IRS Publication 505 is recommended for individuals who have self-employment income or must claim capital gains. (This one is not yet updated for the new tax legislation).

Round up your most recent paycheck stub and tax return before you start. Remember: federal and state treasuries make lousy savings depositories.

Joyce

 

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Improving Your Financial Well-Being

As we move from holiday cheer to a New Year, be realistic with what you would like to accomplish in the New Year.  We have shared about SMART Goals – make your goal: specific, measurable, attainable, realistic and timed.  Be honest with yourself and try to make little changes to your routine.

Sticking to resolutions isn’t easy. One source suggests that after the first week, only 75% of individuals are keeping up with their planned changes.  A month later only 64% continue., and by six months later only 46% are continuing to implement their resolution.

Your mindset is a key when it comes to making changes for the better. Here are some ideas: meditate once a day; express gratitude; volunteer and help others; and see the blessings in your life.

 

Here are some ideas for new years resolutions that could be helpful to you:

  • Learn something new – a language, or something about finances.  Visit your local library for resources.
  • Save small. Even small amounts add up, and can allow you to reach a goal – something that you want to purchase or a trip you want to take.
  • File your taxes early this year if possible to reduce risk of identity theft in filing taxes.

Plan now for a  new year’s resolution that will help you succeed in improving your financial well-being!

Susan Taylor

Susan Taylor

Resources are important whether you are looking to rent your first apartment, pay your bills, buy your first home or send your child to college. There are many ways to save money to reach your goals, and hopefully ISU Money Tip$ will be one of them. I enjoy traveling, needlework and am a novice gardener.

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How Would Tax Law Changes Impact You?

Everyone is subject to tax laws, so we all have a reason to pay attention to proposals that are being discussed in Washington DC. When changes are introduced, it’s human nature for proponents to emphasize the positive and omit details that might disappoint.  As citizens and consumers, it is wise for us to look beyond the “selling points” and examine the details.

One proposal is to raise the standard deduction and eliminate personal exemptions. Analysis of the proposal by a respected non-partisan organization points out that the move would benefit single individuals and couples, but not large families. It remains to be seen if changes in child care credits will equalize the loss of additional personal exemptions.

Changes in tax rates also have hidden impacts. Analysis once again raises the question of where the income breaks will occur. Using the current tax table, adjusted gross income between $15,000 and $19,625 is taxed at 10%; under the proposed changes, that group would see an increase to 12%.

When deciding on a traditional versus Roth retirement account, one factor individuals consider is whether they expect their taxes to be higher or lower during retirement. If you currently pay taxes in the highest tax brackets, there is a good chance you will see a reduction in tax rate after you retire. Analysis indicates that under the proposed changes, a similar reduction may not be experienced by individuals in the middle or lower income brackets.

We will need more details before we can determine how proposed tax law changes may impact us; in the meantime you can learn what experts in the field predict at the Tax Policy Center.

Joyce

 

 

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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Medical Costs and Taxes

Medical costs are often misunderstood and missed on tax returns. The most common misconception, which I hear as a volunteer preparing taxes at the VITA sites, is the belief that the full dollar value is going to be used to reduce income. There is a threshold that you have to pass before any expenses will be counted. Ten percent of your adjusted gross income is the threshold. You can estimate what your threshold will be by looking at last year’s 1040 line 37: if it shows an amount of $40,000, then there is no need to report your medical expenses if they are less than $4,000.

I also find that not everyone knows what is an allowable expense. Over the counter drugs and expenses that were paid with funds from a Flex account or HSA don’t count. On the other hand some expenses are overlooked: mileage to and from a medical appointment, meals and lodging are the most common. The allowance per mile is $.19, not huge, but it can add up if you live in a rural area and are referred to a specialist or clinic in another community. Lodging and meals at a hospital are allowed for parents and other adults when essential for medical care. If the lodging is not at the hospital you are allowed $50 per person, but not meals.

Start now, as a new year has begun, to keep a log of medical expenses, including a record of trips, even if it turns out that you aren’t able to use them on your tax return. No one knows what the coming year holds – a 12 month period can include emergencies and unexpected costs. At the end of the year it will be better to have the data on record than to have to dig for the information.

For a complete list of allowable expenses check out IRS Publication 17 (pdf), Your Federal Income Tax Guide; medical expenses are included in Chapter 21.

Joyce

Joyce Lash

Joyce Lash

Joyce Lash is a Human Sciences Specialist in Family Finance who wants to keep you ahead of the curve on financial information.

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